By Tim Halbach
Many farms are owned by legal entities such as partnerships, corporations or limited liability companies. Being an owner in one of these legal entities is great if things are going well or if you are a majority owner. However, what can you do if you own less than 50% of the legal entity and you no longer desire to remain an owner? Can you get out of the legal entity?
The first place to look is to see if the legal entity has a buy-sell agreement or similar type of agreement. Often this type of agreement will have a provision that provides that if you no longer desire to remain an owner in the legal entity, you can give notice to the remaining owners, and then the remaining owners may buy you out. Usually, the buy-sell agreement will have a formula for determining the purchase price (sometimes a discount may be applied), and may provide that you are either paid out over time or receive a cash payment upfront.
If the legal entity does not have a buy-sell agreement, the next place to look is the bylaws, operating agreement, partnership agreement or some other legal document of the entity. Sometimes, “buy-sell” provisions are found within those documents. If so, you would review those terms to see what happens if you were bought out.
However, not all legal entities have a buy-sell agreement or “buy-sell” provisions. If that is your situation, then what are your options? Besides negotiating a buyout and assuming Wisconsin law applies to your situation, it depends whether the legal entity you are a part of is a corporation, partnership or LLC.
If you are a shareholder in a corporation, you could file a lawsuit seeking to dissolve the corporation if the people in charge of the corporation have acted in a manner that is illegal, oppressive or fraudulent, or if the corporation’s assets are being misapplied or wasted. Generally, if a legal entity is being dissolved, then there is usually a court-ordered sale. The proceeds of the sale are used to pay secured creditors and then unsecured creditors; then whatever is left is divided among the owners based on their ownership percentage.
Another option for a minority shareholder of a corporation is the “dissenters’ rights provisions” of the Wisconsin Statutes. These provisions provide that if the majority shareholder takes certain actions, such as a merger or sale of substantially all of the corporation’s assets, a minority shareholder may compel the purchase of his shares at “fair value.”
Still another option if you are a minority shareholder of a corporation is you could bring a claim for “breach of fiduciary duty” against the majority shareholder if your shares went down in value.
If you are a partner in a partnership, you can dissociate from a partnership, meaning you can leave at any time. In such event, the Wisconsin Statutes provide that the dissociated partner is paid a buyout price equal to the price the partner would have received had the partnership been dissolved and sold its assets. Alternatively, a partner could seek the dissolution of a partnership by having a judge or court order that the partnership be dissolved if the partnership’s business is unlawful, the economic purpose of the partnership is “unreasonably frustrated,” or it is not “reasonably practical” to carry on the partnership.
If you are a member of an LLC, you likewise have the right to dissociate from the LLC and receive a payment for your ownership interests. Alternatively, a member of an LLC has the right to request that a judge or court dissolve the LLC if it is not reasonably practical to carry on the LLC; the LLC is not following its operating agreement; a member or manager is acting in a manner that is illegal, oppressive or fraudulent; or the LLC’s assets are being misapplied or wasted.
Though each legal entity has slightly different variations of getting out, one consistency among the legal entities is that if the majority owners want a minority owner out — provided that minority owner has not broken the law — it is virtually impossible to force a minority owner out. Rather, the majority owners could similarly try to dissolve the legal entity, negotiate a buyout or utilize some other creative legal method to rid themselves of an owner they no longer desire.
Absent a fair buy-sell agreement, none of the alternatives for leaving a legal entity is overly appealing. Each has its own set of complexities. If possible, before you become an owner, you want to try to make sure there is a fair and well-drafted buy-sell agreement in place. It also helps to go into business with people you trust and like.
Halbach is a partner in the agricultural law firm of Twohig, Rietbrock, Schneider and Halbach. Call him at 920-849-4999.